China’s financial calculus in Latin America: Before and after COVID-19

By Margaret Myers / April 2, 2020

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Latin America’s extensive dependence on China as a market for raw materials dealt a serious blow to the region at the onset of the COVID-19 crisis. Even in January, many countries faced lower demand and falling prices for key exports as China’s production and other activity ground to a relative halt. Now, as the region grapples with its own response to the pandemic, governments are bracing for unprecedented economic contraction, while looking anxiously to China for signs of relief.

As Beijing walks a fine line between much-needed stimulus and already staggering debt, China’s road to recovery is still uncertain, however. For that matter, so is China’s possible role in Latin America’s own revival.

Even before the current crisis, China’s booming relationship with the region was slowing in important ways. Once a top creditor to Latin American governments, at times exceeding sovereign lending from the Inter-American Development Bank and World Bank, Chinese state finance to the region has all but dried up, according to a new report from the Inter-American Dialogue and Boston University Global Development Policy (GDP) Center. Chinese policy banks—China Development Bank (CDB) and China Export-Import Bank (Eximbank)—provided just $1.1 billion in finance to the region’s governments in 2019. By comparison, Chinese finance to the region peaked in 2010 at over $35 billion.

There are many possible reasons for the decline in Chinese sovereign loans to Latin America, including growing disinterest among Chinese banks in funding the region’s most fragile economies. Though once the primary recipient of Chinese loans—to the tune of $62.2 billion since 2007, according to Inter-American Dialogue and GDP Center data—Venezuela has received no new loans from China’s policy banks for the past three years. And in 2018, Beijing ended a grace period for Venezuela on its principal payments to China, a sign of waning financial goodwill toward the Nicolás Maduro government.

Demand for Chinese state finance among top loan recipients also slowed somewhat in recent years. Facing financial instability at home, Argentina and Ecuador have largely avoided growing their foreign debt. Even when they did, China’s model of lending, which sometimes encourages the use of Chinese companies or equipment, wasn’t always appealing. Ecuador looked to the IDB—not China—in 2019 for a $300 million economic support package.

This could all change, of course, as the region faces the economic consequences of COVID-19. Even countries, such as Chile, Peru, and Mexico, that have rejected China’s model of lending, might soon view Chinese finance with renewed interest, especially if other financial institutions aren’t as forthcoming with assistance. International banks and credit rating agencies expect a contraction of anywhere between one and seven percent from Mexico in 2020. And Ecuador, grappling with a surge in coronavirus cases as home, is on the brink of default. The outlook is troubling across the region.

Whether China steps up and in what way will largely depend on Beijing’s measures to right its economy. A swift Chinese recovery would be hugely beneficial for much of the region. But China’s stimulus response won’t be a panacea for Latin America, as it perhaps was in the past. So far, China has refrained from issuing the sort of massive, four trillion yuan stimulus applied post-2008, which considerably grew Latin America’s trade flows to China. And despite some recent signs of overseas assistance for debt refinancing from Chinese banks, Beijing’s efforts to grow the Chinese economy while also managing dangerous debt levels will constrain overseas deal making for the time being, even as China looks to boost lending for foreign trade and CDB considers support for Belt and Road Initiative projects derailed by COVID-19.

The Latin America region has nonetheless factored prominently in China’s global coronavirus outreach, including through increasingly extensive donations and sales of personal protective equipment and diagnostic technologies to Latin American governments. But as was the case even before the pandemic, China will continue to proceed with some caution in Latin America. Future Chinese engagement will be carefully justified on the basis of economic and/or political return on investment.

Margaret Myers is director of the Asia and Latin America program at the Inter-American Dialogue.